Energy Prospectus

Opening Prices:
> WTI is down 71c to $84.84/Bbl, and Brent is down 80c to $87.58/Bbl.
> Natural gas is up 11.4c to $3.916/MMBtu.

AEGIS Notes
Oil

Oil prices are up 10% so far this year, and some forecasters are singing an even more bullish tune
> Morgan Stanley joined Goldman Sachs in forecasting $100 oil later this year
> Earlier this week, the Paris-based IEA made more bullish revisions to its 2022 outlook
> At least one Wall Street firm isn’t so optimistic, Citigroup cautioned that sticking to a bullish view could be dangerous after this quarter

Bakken crude prices have risen to the highest premium over WTI in four years as cold weather disrupted Canadian production (BBG)
> Bakken Clearbrook traded at a $3.225/Bbl premium to U.S. oil futures, the largest premium since October 2017
> Disruptions to Canadian crude have oil buyers seeking supply elsewhere. The extreme cold also caused curtailments in North Dakota but not to the extent it caused slowdowns in output from Alberta
> Synthetic crude in Canada traded at a 35c/Bbl premium above WTI futures, the biggest premium in over a year

Natural Gas

Gas prices are up this morning, with the prompt contract trading 11.4c higher near $3.916
> U.S. gas demand is in the first of the two major cold spells forecasted for the next 7-10 days, and demand is near its highest levels of the season
> Next week’s cold spell is expected to be even more severe, with the U.S. lower-48 average temperature forecast to be 35.7 °F
> Canadian imports are at their highest levels since Winter storm Uri in February 2021, at around 8 Bcf/d
> The South Central region is tightening as U.S. LNG feedgas demand is back above 13 Bcf/d, and Texas gas production has dipped as a result of freeze-offs

The EIA reported a 206-Bcf withdrawal for the week ending January 14, its largest of the heating season so far
> U.S. natural gas storage inventories decreased to 2.81 Tcf, and storage volumes now stand 226 Bcf below last year’s level and 33 Bcf above the five-year average of 2.77 Tcf
> The withdrawal was slightly above analysts’ expectations
> The ICE end-of-season number being traded on ICE settled 20 Bcf higher at 1.48 Tcf

The Energy Report: Days Like This
By Phil Flynn (Jan 21, 2022 09:25AM ET)

Mama said there’d be days like this, and we did too as the oil market is pulling back from a case of too much bullishness. Oil was up above the Bollinger band and, being very overbought, could not stand alone against a backdrop of a plunging stock market and a mixed Energy Information Administration (EIA) supply report that was weighed down by a bearish gasoline supply reading.

Even fears that Russia might accept Biden’s invitation to make a “small incursion” into Ukraine were put on the back burner as crude oil started a sell-off that brought down products that held up pretty well for the bulk of the official trading session. With earnings and Fed fear about increasing interest rates, the key for oil is whether it can ignore the headwinds of a potentially slowing economy while the global supply available to meet demand numbers looks bleak.

Bloomberg News reported that the IEA is trying to figure out where 200 million barrels of oil went. On Wednesday, the adviser to energy-consuming nations said that observable global oil inventories plunged by more than 600 million barrels last year. That would be fine were it not for the fact-based on its estimates of supply and demand — that the decrease should only have been 400 million. There is always a gap between the two, but the 200-million-barrel discrepancy means the oil market could be tighter than previously thought.

The IEA said the gap could result from underreporting of demand or over-reporting production. Its monthly report is a benchmark for traders trying to evaluate the balance between supply and demand the world over. the agency said on Wednesday:

“A retrospective view shows the difficulty over the past two years of reliably analyzing and forecasting supply and demand. Lessons learned will improve the work in 2022 and allow us to better understand our market.”

Well, I have contended for some time that based on what I see, the IEA has underestimated oil demand on a consistent basis. I assumed it was because the agency represents oil-consuming nations and that underestimation usually caused oil prices to dip, allowing those countries to buy oil cheaper. I also believe that the IEA has drifted away from its original mission and has become more of a quasi-political organization than an oil reporting agency. I also have questioned why the market reacts to their long-term reports because they have been wrong and consistently wrong when it’s come to predicting future oil demand trends.

The IEA also has been complicit in creating an environment that restricts the flow of money into new oil and gas projects.

Of course, we are seeing the fallout from the lack of investment in fossil fuels and fossil fuel projects, and it’s creating many problems throughout the globe. One of the main problems is that the International Energy Agency and the countries and the Paris climate accord and the Biden administration are betting our energy future on technologies that don’t exist. They have given the impression that the world can become carbon neutral by 2050, but only if we stop all investments in fossil fuels.

Well, traders are going to keep an eye on what the Fed talks about next week. The IMF managing director Georgieva said the Fed rate hikes could put a damper on what already is a sluggish recovery in some areas.

Some people are worried that the Fed may overreact to a sharp rise in inflation, but others think that the Fed has created this inflation with too much easy money. Whatever side of the debate you fall on, the bottom line is that if the Fed becomes more aggressive in raising rates, it could slow the economy and slow oil demand. That will take some time to happen. On the other hand, Christine Lagarde says that the recovery has been much stronger than anyone had expected, so that in turn may increase the odds that she is ok with a Fed interest rate increase.

The EIA did not give us a clear direction. Crude stocks fell by 1.3 million barrels. The SPR released 1.3MB. Crude demand increased 535k bpd. Ready to use gasoline stocks increased by 4.9MB.

Total gasoline stocks increased 5.9MB. This has been the biggest 3 weeks build in gasoline history. ULSD stocks fell 1.7MB.

This is a key day. A close below $82.00 today would look a little toppy, and that would put us on guard for a larger correction. On the other hand, if we do see some type of action over the weekend in Ukraine, that could give the oil a big boost. When in doubt, pair back positions to see if the correction in oil is going to be modest or a more sizable sell-off.